What to do with a dud investment property

As with any investment, real estate has its good, bad and average performing assets and if you’re not careful, you could easily end up with a property investment lemon.

The problem is owning a dud property means:

You could be losing money because your holding costs may exceed your income (rent and capital growth)

You lose the opportunity to make better returns elsewhere

The lack of equity and rental growth will compromise your ability to keep growing your portfolio.

The key is in the questions

The best way to uncover an underperforming asset before it eats too far into your bottom line is to annually review your portfolio and ask yourself some hard questions:

1. Is this property performing like I expected it to?

2. Is this property outperforming the market?

3. If this property were on the market today, would I buy it again?

4. Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?

5. Is this property likely to outperform the market averages for the next decade or more?

The answers to these questions help ensure that I retain a top performing property portfolio and that my money works hard for me.

The key to this is to analyze your investment goals and determine if your current property portfolio has you on the right path to achieving those goals.

What makes a property underperform?

The problem could be market related or relate specifically to your property and usually falls into one of 4 categories:

Timing: Buying at the wrong time in the cycle, when values are at or near the peak can mean that your property’s price may languish for a few years, or even fall in value for a while.

Price: Similarly if you pay too much you’re likely to have a few years of no capital growth.

Location: Some suburbs underperform others and even in the better areas, some locations are not as desirable as others and underperform.

The property itself. In other words poor property selection.

If you’ve bought the right property at the wrong time or paid too much, you’ll generally find real estate is forgiving and in time your property will start to perform.

But if you’ve bought the wrong property or in the wrong location, sometimes you just need to bight the bullet and sell so you can buy something better.

After all… if a property has not performed well over a 3 or 4-year period, it’s likely to be a dud.

The answers to these questions help ensure that I only retain top performing properties in my portfolio and that my money is working hard for me.

Is it going according to plan?

One of the big mistakes many investors make is not having a strategy for their investments.

If you don’t have a plan how do you know what to buy and how do you know if it’s performing as expected?

The other big mistake they make is not reviewing their property portfolio to make sure it’s performing according to plan.

In my opinion this should be done with the help of someone who is independent as many of us get too emotionally attached to our properties

Then if you’ve bought a dud rather than ignoring it ask yourself: why isn’t this property working like I planned?

Of course this assumes the strategy you’re following works – remember many investors fail because they’re following a flawed plan.

Maybe the answer is as easy as changing to a more proactive property manager, or maybe you could improve its value and make it more attractive to tenants by undertaking some renovations and upgrading your property,

Sometimes it’s simply allowing time to work its magic and waiting for the property cycle to move on.

Selling your lemon

While property is a long term investment, occasionally the right answer is to cut your losses and sell up so you can buy a better property.

However if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.

But what if it’s the wrong time to sell?

Look at it this way…if, due to your financial capacity, you can only afford to hold five properties you should aim to own the best five performing assets you possibly can.

I know that there are times when the market is flat and you may not get the price you would like, but waiting to take action until things pick up again will only see the gap between your underperforming property and better performing investments widen as the market improves.

At this point, it will become harder and more expensive to buy the type of property you’d like to own.

Essentially the sooner you can identify and offload an underperforming property, the better.

Sure you may crystalize a loss or pay capital gains tax on the sale as well as selling costs and then pay stamp duty and acquisition costs on your next purchase.

And I understand that this may mean taking two steps back to move three steps forward.

But if you treat your property investments like a business, and that’s what all strategic investors do, you’ll understand that while it’s costly to dispose of a dud property, it’s even more expensive to hold onto an under performing asset.

SO WHAT WILL BE YOUR NEXT STEP?

Are you going to take advantage of the property markets in 2017 or are you going to get caught by the traps ahead?

If so and you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

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About Real Estate Talk

RealEstateTalk.com.au is your trusted voice in property investment. Australia’s most respected real estate investing experts give tips on wealth creation. We will be discussing topics like property investment, property development (helping you understand the process), cash flow positive properties, negative gearing and finance (so you can borrow more from the banks), property investment in the latest hot spots as well as the USA, property tax (allowing you to structure for legal tax deductions and asset protection), negotiation, property management (assisting landlords and tenants understand their rights and responsibilities), negotiation and the psychology of property investment success.